Business Combination – a transaction wherein the acquirer obtains control (ability to direct the operations

and financial policies) over an acquiree

Control exists when all three requirements are met (IFRS 10)
a. Power over the investee (ability to direct)
b. Exposure, or rights, to variable returns from involvement with investee
c. Link between power and exposure to variable returns (you can use power to influence the variable
returns)

Accounting for business combination (IFRS 3) – acquisition method

Steps:
1. Identify the acquirer (note that all business combinations should have an acquirer)
2. Determine the acquisition date (date wherein acquirer obtains control over the acquiree)
3. Determine the valuation
a. For assets acquired from acquiree and liabilities assumed, generally measured at fair value
on date of acquisition
b. For non-controlling interests: choice between fair value on date of acquisition (full
goodwill approach) or proportionate share in the net identifiable assets of the
acquiree (partial goodwill approach)
c. Consideration transferred/purchase price: measured at fair value
4. Calculate goodwill or gain on bargain purchase, if any, arising from the transaction
a. Goodwill = excess of total consideration (including NCI) over the fair value of net
identifiable assets
b. Gain on bargain purchase = excess of fair value of net identifiable assets over total
consideration (including NCI)

NOTE: If gain on bargain purchase, the standard requires the entity to re-evaluate/double check

Accounting for direct costs related to business combination:

General rule: Expensed outright
Exception: Costs to issue debt or equity securities (accounted for in accordance with IFRS 9)

Pro-forma solution for GW (Gain)

Total Parent NCI
Purchase price/Consideration XX XX XX1
FVNIA (XX) (XX) (XX)
GW (Gain on bargain purchase) XX XX XX2
1 NCI is initially measured at either fair value or proportionate share

2 If negative or gain for NCI, use proportionate share (NCI can not recognize a gain on bargain purchase)

Problem 1:
On December 31, 2022, Parent Corporation enters into a business combination by acquiring all the assets and
assuming all the liabilities of Acquiree Corporation in which the latter will be dissolved (business combination
by net asset acquisition, NO NCI). Parent’s considerations of the following:
 • Cash payment of P1,977,500
• 60,000 unissued shares of its P100 par ordinary shares with a market value of P101 per share.
• 6% P2,000,000 bonds payable.
• A contingent payment of P1,500,000 cash on December 31, 2019 if the cash flows from operations
during the 2-year period 2022-2019 exceed P2,500,000 per year. Parent estimates that there is a 40%
chance of probability that the P1,500,000 will be required.

In addition, Parent paid the following at the time of the merger:

Finder's fee (expensed) P110,000
Diligent audit prior to business combination (expensed) 75,000
SEC registration cost (related to issuance of shares) 125,000
Cost of printing and issuing stock certificates (related to issuance of shares) 25,000
General and administrative salaries attributable to the merger (expensed) 75,000

Statements of financial position for the two companies as of December 31, 2022 before the merger follow:
Parent Corporation Acquiree Corporation
Book Value Fair Value Book Value Fair Value
Cash P2,950,000 P2,950,000 P720,000 P720,000
Receivables 1,200,000 1,200,000 900,000 900,000
Inventories 2,400,000 2,500,000 1,500,000 1,750,000
Land 3,000,000 3,200,000 3,000,000 3,100,000
Building, net 12,000,000 10,000,000 5,500,000 4,500,000
Equipment, net 2,000,000 2,000,000 900,000 950,000
Goodwill (GW of acquiree is ignored) 750,000 750,000 50,000 -
In progress research and development - - - 50,000
Total P24,300,000 P12,570,000 11,970,000

Accounts payable P3,600,000 P3,750,000 P1,120,000 P1,200,000

Accrued expenses 1,500,000 1,100,000 880,000 900,000
Share capital, P100 par 10,000,000 5,000,000
Share premium 4,200,000 2,500,000
Retained earnings 5,000,000 3,070,000
Total P24,300,000 P12,570,000 2,100,000

1. What is the amount of goodwill to be recognized on the acquisition date? 767,500

2. What is the amount of total assets immediately after the merger? 34,650,000
3. What is the amount of the total liabilities immediately after the merger? 9,800,000
4. What are the amounts of (1) share premium and (2) retained earning immediately after the merger?
(1) 4,110,000 and (2) 4,740,000

Cash 1,977,500
Shares issued (60,000 shares x P101 fair value per share) 6,060,000
FV of the bonds issued (since effective rate = stated rate, FV = face value) 2,000,000
FV of contingent consideration (using expected value: P1,500,000 x 40% probability) 600,000
 Total consideration/purchase price of the parent 10,637,500

For the FV of the bonds:

(1) Is the FV given in the problem? No
(2) Is the effective rate given in the problem? No (assume that the effective rate = stated rate)

Purchase price 10,637,500

Fair value of identifiable assets acquired 11,970,000
Fair value of liabilities assumed (2,100,000)
Fair value of net identifiable assets acquired (FVNIA) (9,870,000)
Goodwill (Gain on bargain purchase) 767,500
Pre-existing goodwill of acquiree is ignored because we are computing a new/updated goodwill arising from
the transaction.

Entry to record the acquisition:

12/31/2022 Assets of the Acquiree (at fair value) 11,970,000
Goodwill (acquired) 767,500
Liabilities of the Acquiree (at fair value) 2,100,000
Cash 1,977,500
Share Capital (at par: 60,000 x P100) 6,000,000
Share Premium (60,000 x P1) 60,000
Bond Payable 2,000,000
Estimated Liability – Contingent Consideration 600,000

12/31/2022 Expenses 260,000

Share Premium – current issuance 60,000
Share Issuance Costs 90,000
Cash 410,000

Accounting for share issue costs under PIC Q&A

P150,000 SIC debited to:
1st: Share premium from current issuance (max. P60,000) 60,000
2nd: Share Issue Costs

Presentation of share issue costs account: contra-equity account

1st: Contra- share premium from previous issuances (max. P4,200,000) 90,000
2nd: Contra- RE

Assets
Before acquisition 24,300,000
Acquired from acquiree Payments
Identifiable (at fair value) 11,970,000 Purchase price (cash) 1,977,500
Goodwill 767,500 Costs (expense and SIC) 410,000
After acquisition 34,650,000
 Cash
Before acquisition 2,950,000
Acquired from acquiree Payments
Identifiable (at fair value) 720,000 Purchase price (cash) 1,977,500
Goodwill 0 Costs (expense and SIC) 410,000
After acquisition 1,282,500

Liabilities
Before acquisition 5,100,000
Bond issue costs 0 Assumed from acquiree 2,100,000
Bonds payable issued 2,000,000
Estimated liability 600,000
After acquisition 9,800,000

Shareholders’ Equity
Before acquisition 19,200,000
Expenses 260,000 FV of shares issued 6,060,000
Share issue costs 150,000 Gain on bargain purchase 0
Non-controlling interest 0
After acquisition 24,850,000

Assets 34,650,000 = Liabilities 9,800,000 + Equity 24,850,000

Share Premium
Before acquisition 4,200,000
Share issue costs 150,000 Premium from issuance 60,000

After acquisition 4,110,000

Retained Earnings
Before acquisition 5,000,000
Expenses 260,000 Gain on bargain purchase 0
Excess SIC over SP 0

After acquisition 4,740,000

Share Capital
Before acquisition 10,000,000
Par value of shares issue 6,000,000

After acquisition 16,000,000

Share Capital 16,000,000 + Share Premium 4,110,000 + Retained Earnings 4,740,000 + NCI 0 = Equity
24,850,000
Problem 2:
On January 2, 2021, Parent Corporation purchased 80% of the outstanding shares of Subsidiary Company for
a consideration of P19,000,000. Including in the price paid is control premium in the amount of P500,000.
The acquisition-related cost amount to P45,000. At that date, Subsidiary had P16,000,000 of ordinary shares
outstanding and retained earnings of P6,400,000

Subsidiary’s equipment with a remaining life of 5 years had a book value of P9,000,000 and a fair value of
P10,520,000. Subsidiary’s remaining assets had book values equal to their fair values. All intangibles except
goodwill are expected to have remaining lives of 8 years. The income and dividend figures for both Parent and
Subsidiary are as follows: Net income of Parent in 2021 is P3,600,000; 2022 is P4,400,000. Net income of
Subsidiary in 2021 is P1,360,000; 2022 is P2,040,000. Dividends declared by Parent in 2021 is P880,000; 2022
is P1,560,000. Dividends declared by Subsidiary in 2021 is P280,000; 2022 is P520,000. Parent’s retained
earnings at the date of acquisition was P13,800,000.

1. What is the consolidated profit in 2022?

2. What is the non-controlling interest in net income in 2021?

Problem 3:
On January 1, 2021, Entity A acquired 60% of the outstanding ordinary shares of Entity B at a gain on
bargain purchase of P80,000. For the year ended December 31, 2022, Entity A and Entity B reported sales
revenue of P4,000,000 and P2,000,000 in their respective separate income statements. At the same year,
Entity A and Entity B reported cost of goods sold of P2,400,000 and P1,400,000 in their respective separate
income statements.

During 2021, Entity A sold inventory to Entity B at a selling price of P560,000 with gross profit rate of 40%
based on cost. On the other hand, Entity B sold inventory to Entity A at a selling price of P800,000 with
gross profit rate of 30% based on sales during 2022.

On December 31, 2021, 25% of the goods coming from Entity A remained in Entity B’s inventory but all
were eventually sold to third parties during 2022. As of December 31, 2022, 40% of the goods coming from
Entity B were eventually sold to third persons.

For the year ended December 31, 2022, Entity A reported net income of P1,120,000 while Entity B reported
net income of P400,000 and distributed dividends of P100,000. Entity A accounted for its investment in
Entity B using cost method in its separate financial statements.

1. What is the consolidated sales revenue for the year ended December 31, 2022?
2. What is the consolidated cost of goods sold for the year ended December 31, 2022?

Problem 4:
On July 1, 2022, Parent Company purchased 80% of the outstanding shares of Subsidiary Company at a cost
of P4,000,000. On that date, Subsidiary had P2,500,000 of capital stock and P3,500,000 of retained earnings.
For 2022, Parent had income of P1,400,000 from its separate operations and paid dividends of P750.000. For
2022, Subsidiary reported income of P325.000 and paid dividends of P150,000. All the assets and liabilities of
Subsidiary have book values equal to their respective fair market values. Assume income was earned evenly
throughout the year except for the intercompany transaction on October 1. On October 1, 2022, Parent
purchased a machinery from Subsidiary for P500.000. The book value of the machinery on that date was
P600.000. The loss of P100,000 is reflected in the income of Subsidiary indicated above. The machinery is
expected to have a useful life of 5 years from the date of sale.

1. In the December 31, 2022 consolidated financial statements, how much is the consolidated net
income attributable to the parent company?

Problem 5:
On January 1, 2022, Parent Corporation acquired 80% of ordinary shares of Subsidiary Company at fair value
of net assets acquired. All assets of Subsidiary company are fairly valued except for a blue office equipment
with book value of P2,100,000 and fair value of P1,400,000. On June 30, 2022, Subsidiary Company sold the
said blue office equipment to Parent Corporation at a selling price of P3,000,000. On June 30, 2022, the
remaining useful life of the blue equipment is 3 years On October 1, 2022, Parent Corporation sold a 2-year-
old red office equipment to Subsidiary Company for P2,800,000 at a gain of P400,000. On October 1, 2022,
the remaining useful life of the red equipment is 4 years.

1. What is the consolidated depreciation expense of equipment for the year ended December 31, 2022
and consolidated book value of equipment on December 31, 2022, respectively?

Problem 6:
On January 1, 2022, Parent Company purchased 70% of ordinary shares of Subsidiary Company at a price of
P3,000,000. On January 1, 2022, Parent reported retained earnings in the amount of P10,000,000. As of this
said date, the total assets of Subsidiary Company are P6,500,000 while its total liabilities amounted to
P1,000,000. All of the assets and liabilities of Subsidiary are properly valued except for a building with book
value of P1,500,000 and fair value of P1,000,000. The building has remaining life of 10 years. On April 1,
2022, Parent sold inventories at a price of P200,000 to Subsidiary with gross profit rate of 25% based on cost.
On July 1, 2022, Subsidiary sold a machinery to Parent at a price of P880,000, when its book value is still
P1,000,000 on this date. As of this date, the said machinery has remaining life of 3 years. As of December 31,
2022, Subsidiary has resold to its customers 40% of inventories coming from Parent. For the year ended
December 31, 2022, the two companies reported the following information:
Parent Company Subsidiary Company
2022 Net Income P4,000,000 P2,000,000
2022 Dividends Declared P1,500,000 P500,000

1. What is the consolidated retained earnings in Parent’s Consolidated Statement of Financial Position
on December 31, 2022?
2. What is the noncontrolling interest in net assets to be reported in Parent’s Consolidated Statement of
Financial Position?